Revenue Recognition
Construction accounting requires unique revenue recognition rules for contracts in progress.
In most cases, revenue is recognized using the Percentage of Completion Method. Under this method, revenue is recognized using an estimate for the overall anticipated profit for a particular contract multiplied by the estimated percent complete of that contract. This involves the inherent risk of relying upon estimates.
Under SOP 81-1, revenue is also allowed to be computed using the Completed Contract Method. Under this method, contract revenues and costs are not recognized until the contract is substantially complete. However, this method is not allowable if the results are significantly different than results using the Percentage of Completion Method. The Completed Contract Method is allowed in circumstances in which reasonable estimates cannot be determined. However, these types of circumstances can be construed as a lack of internal control.
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